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  • Heather PresleyCowen

Empowering Banks (and Financial Institutions) in Housing Development: Beyond Traditional Finance


The role of banks in community development, particularly in housing, is evolving. Traditionally seen as providers of mortgages and purchasers of tax credits, banks are often perceived as sidelined in innovative housing development due to regulatory constraints and risk management. However, through the H.O.M.E. method, we can unlock a suite of nontraditional tools enabling banks to take a more proactive, impactful role in this sector.


Tackling the Appraisal Gap Challenge

  • The Issue: In emerging markets and rejuvenated downtown regions, the issue of appraisal gaps frequently obstructs housing development. This challenge is particularly pronounced as remote workers and millennials search for affordable, inclusive living spaces. However, banks often struggle with the scarcity of comparable sales data in these areas. Notably, in many areas of the Midwest, there is an increasing demand for housing featuring higher rents and home prices, appealing to both potential renters and buyers. Approximately half of these individuals originate from within the same jurisdiction, suggesting that more affordable housing units could enter the market as a result. Nonetheless, the impact of appraisal gaps can be severely felt in these communities, often leading to a slowdown in housing production.

  • The Opportunity: Innovative financing and development approaches can bridge this gap, enabling banks to support vibrant, diverse communities. In this post, we'll explore three specific tools: Commercial and Residential TIF, Master Leases and Corporate Guarantees. In future blogs, I'll explore a few more.

Commercial and Residential TIF (Tax Increment Financing)

  • The Mechanism: TIF bonds offer a financially advantageous and risk-mitigated way for developers to engage in significant development projects, particularly those focused on community revitalization and improvement. TIF allows banks to invest in community improvement projects through the purchase of bonds. These investments support infrastructure and development that raise property values and spur growth.

  • The Impact: By engaging in TIF projects, banks can directly influence community development, ensuring long-term benefits for residents and businesses alike.

Master Leases and Corporate Guarantees

Master Leases: From a bank's viewpoint, both options provide a layer of security and risk mitigation, but they operate differently. A master lease directly involves the bank in the rental process, providing immediate financial stability, whereas a corporate guarantee is a promise of financial backup, coming into play if the primary borrower fails to meet their obligations. Both can be effective tools in innovative housing finance, depending on the specifics of the project and the involved entities' financial stability and business models.

  • How it Works: In a master lease arrangement, a single entity (like a major employer or an organization) leases multiple units of a housing project. This entity then subleases these units to individuals, such as its employees.

  • Bank's Perspective: For a bank, a master lease offers a steady and reliable revenue stream, as the lease payments are typically fixed and backed by a financially stable organization. The risk of vacancy or non-payment is transferred from the bank to the master lessee.

  • Example: A healthcare provider in a growing city might enter into a master lease for a new apartment complex. The healthcare provider leases 100 units and then provides these units to its staff. The bank financing the project has a direct lease agreement with a stable, creditworthy healthcare provider, ensuring consistent rental income.

The surge in rental rates in many Midwest communities offers a unique opportunity for communities experiencing stagnation yet possessing identifiable market potential. This increase in revenue creates new financing options for developers. Notably, when about half of the potential renters are from within the community itself, there's a dual benefit. This scenario not only naturally boosts the availability of affordable housing, which is already present within the community, but also stimulates economic growth. In addressing the challenge of appraisal gaps, utilizing a master lease can be an effective strategy. This approach helps bridge financial discrepancies and facilitates the development of these communities. Financing projects through master leases with major employers presents a strategic opportunity for banks. These employers are frequently motivated to contribute to housing solutions, primarily due to the challenges they face in recruiting and retaining talent, which often stem from a scarcity of suitable housing options for their employees and new recruits. By engaging in such arrangements, banks can secure a consistent revenue stream. This approach not only diminishes financial risk but also actively supports the development of workforce housing. This method aligns the interests of banks, employers, and community development professionals, creating a synergistic solution to housing challenges.

Corporate Guarantees: Secure corporate guarantees to mitigate financial risks, encouraging banks to finance ambitious housing projects.


  • How it Works: A corporate guarantee involves a corporation agreeing to fulfill the financial obligations of a borrower if the borrower fails to do so. It's a pledge by a parent company or similar entity to back a loan taken out by a smaller entity.

  • Bank's Perspective: This is seen as a risk mitigation tool. The Bank has the assurance that if the borrower (in this case, a housing developer or property manager) defaults, a larger, more financially robust entity will cover the debts. However, the risk of vacancy or non-payment directly impacts the borrower first, before the guarantor steps in.

  • Example: A local housing developer may take a loan to build a residential complex and have it guaranteed by a large corporation. If the developer fails to make loan payments due to issues like low occupancy, the corporation would then be responsible for covering the debt.

Expanding the Toolkit:

Expanding the toolkit for banks to get involved in housing development offers several benefits, not only for the banks themselves but also for communities, developers, and the broader economy:

  1. Diversification of Portfolio: Engaging in housing development allows banks to diversify their investment and loan portfolios. This diversification can reduce overall risk and increase the resilience of banks against economic downturns in specific sectors.

  2. Community Development and Revitalization: Banks can play a pivotal role in revitalizing communities by financing housing projects, especially in underdeveloped or economically struggling areas. This can lead to overall community improvement, which, in turn, can create a healthier environment for local businesses and residents.

  3. Addressing Housing Shortages: Many regions face housing shortages, particularly workforce attainable housing. Banks can contribute to solving this pressing issue by financing new housing projects, thereby helping to meet the demand for homes and support community stability.

  4. Strengthening Relationships with Local Governments and Businesses: By participating in housing development, banks can forge stronger relationships with local governments and businesses. These partnerships can lead to more opportunities and can enhance the bank's reputation in the community.

  5. Generating Stable Long-term Revenue: Real estate and housing development projects typically offer long-term, stable revenue streams. For banks, this means a consistent return on investment over an extended period.

  6. Social Responsibility and Positive Public Image: Involvement in housing development, particularly in workforce attainable housing projects, positions banks as socially responsible entities. This can enhance their public image and brand value.

  7. Leveraging Technological Advances: The growing field of housing development is increasingly incorporating technology and innovation. Banks can leverage these advancements to improve their service offerings, efficiency, and risk assessment models in real estate financing.

  8. Regulatory Compliance and Incentives: In many regions, banks are encouraged or mandated to invest in community development projects, including housing, as part of regulatory requirements. Expanding their toolkit in this area can help banks meet these requirements and possibly benefit from governmental incentives.

In summary, the expansion of tools and strategies for banks in housing development not only promotes economic growth and community welfare but also aligns with the banks' business interests by diversifying and stabilizing their investment portfolios, fostering community goodwill, and meeting regulatory mandates.

The Call to Action for Banks

Banks have a unique opportunity to reshape their role in housing development. By embracing these nontraditional tools, banks can transition from sideline players to active participants in creating inclusive, sustainable communities. The H.O.M.E. method provides a framework for this transition, offering a path for banks to invest in housing solutions that truly meet the needs of today's diverse population.

The future of housing development requires innovative thinking and a collaborative approach. Banks, armed with these tools and a willingness to engage in nontraditional financing methods, can play a crucial role in building communities that cater to a wide range of needs and preferences. It's time to create the space for banks to come back to the table and be part of the solution, driving positive change in our communities.

To learn more about how you can be a part of this innovative approach to housing and community development, join us for our upcoming webinar on the H.O.M.E. Method. Click here to visit our workshop landing page and reserve your spot today.


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